Tyler Lewis - CONSOL Energy, Inc. Nicholas J. DeIuliis - CONSOL Energy, Inc. David Michael Khani - CONSOL Energy, Inc. Timothy C. Dugan - CONSOL Energy, Inc..

Holly Stewart - Scotia Howard Weil Neal D. Dingmann - SunTrust Robinson Humphrey, Inc. Joseph Allman - FBR Capital Markets & Co. Jeffrey Robertson - Barclays Capital, Inc. Biju Perincheril - Susquehanna Financial Group LLLP Jeffrey Campbell - Tuohy Brothers Investment Research, Inc. James A. Spicer - Wells Fargo Securities LLC.

Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy's Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to Vice President of Investor Relations, Tyler Lewis. Please go ahead..

Thanks, Allan, and good morning to everybody. Welcome to CONSOL Energy's second quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Dave Khani, our Chief Financial Officer; Tim Dugan, our Chief Operating Officer; and Don Rush, Vice President-Energy Marketing.

Today, we will be discussing our second quarter results, and we have posted an updated slide presentation to our website.

As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks which we have laid out for you in our press release today, as well as in our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Dave, and then Tim.

And then we will open the call for Q&A which Don will participate in as well. With that, let me turn the call over to you, Nick..

Well, good morning, everybody. CONSOL Energy is at a really interesting point in its history and in its transformation. You can see a lot of this at play when you look at our recent results and our future projections.

So I'm going to start by reviewing the key drivers of our performance, and when I'm doing that, I'll be jumping backwards and forwards in time a bit to kind of paint a picture of how much has and how much is changing within the company.

The main highlights and variances of the quarter compared to the first quarter, they'll be summarized on slide 3, so you might want to be looking at that while I walk through this. So let's start with the underlying drivers of our financial performance, the E&P and the Coal segments.

On the E&P side, we've been posting some pretty impressive continuous improvement milestones over the past two years. Comparing today's drilling efficiencies and completion designs and well type curves to even just a year ago shows a substantial improvement which culminates and reduce capital intensity for our (2:03) target level production growth.

That boosts rate of returns, cash flows, and of course NAV per share. Now, these efficiency gains, they help us on two fronts. First front, they cover for us when we hit short-term bumps in the road like the delayed tight ends on two pads that we saw in the second quarter.

So if we lost short-term production due to timing delays or the 3 Bcf that we lost due to an asset sale, we're able to make it up in 2017 in part because of the upside elsewhere in the portfolio.

You also see the benefit on (2:35) our cost line where total production cost dropped by $0.12 which in turn set us up quite nicely in the near future when the even lower-cost deep dry Utica starts to come into play.

Second way that we get efficiency gains to help us is that they create production growth opportunities at high rate of returns to grow NAV per share.

That's why we're increasing our 2017 E&P capital by about $78 million based off the midpoint, which is mainly being driven by drilling an additional nine wells in 2017 and by increased service costs related to pressure pumping.

Some of this additional activity in 2017 along with the acceleration in our turn-in-line schedule in 2018 due to cycle time compression is expected to increase 2018 production to 520 Bcf to 550 Bcf, which is a 30 Bcf increase compared to the previous quarter's guidance for 2018. You boil it down and you see continuous proven action.

We're able to hold 2017 production guidance. We get more work done in 2017 and we raised 2018 production guidance by 30 Bcf. Now, Tim is going to cover all of this in much more detail and in a couple of minutes. Jumping over to the Coal segment, similar story as the CNXC team highlighted last night on their call.

The Pennsylvania mining complex is as efficient as it's ever been when you look at metrics such as tons per man-hour.

That's the result of dozens of improvements the Coal team drove over the past two years, and on top of that, the sales team has fought for (4:02) in REIT market from competitors, and it did so strategically by targeting the most efficient, most run (4:08) power plants out there.

That puts us in a strong position when we have mild weather like the first half of 2017 to be able to adjust and still hit annual cash flow targets. And then looking at asset sales, they contributed more than their fair share so far this year when it comes to transforming our balance sheet. We continue to execute our monetization program.

We received around $326 million in proceeds this quarter. Year-to-date, we received $345 million, which is above the previous quarter's guidance of $300 million. The success we're seeing on asset sales, that's helping to further delever the balance sheet.

In this quarter, our leverage ratio decreased to 3 times compared to 3.5 times at the end of the first quarter. Even if you assume we don't sign up or close any additional asset sales in 2017, we expect to conclude the year with leverage ratios in the mid-2s.

If we bring additional monetization opportunities to the table this year, which is definitely our expectation, that drives leverage ratio even lower. As for our top line, the commodity pulled back end basis-wide in the quarter. And as a result, our average sales price declined.

However, the decrease was partially offset with continued cost improvements in the quarter. We provided comparative data in our release as to how much the NYMEX forwards and basis differentials have changed over the past quarter for the rest of the year.

So given the pullback in natural gas pricing, we mark to marketed our 2017 total company EBITDA which is now expected to be approximately $870 million, a $55 million decrease compared to last quarter's guidance. I'd like to shift now and provide a quick update on the separation of our E&P and Coal businesses.

And as we discussed in the past, we decided to pursue parallel paths from the outset which included both a sale process and a spin-off process. That wasn't just a good decision. In hindsight, that turned out to be a great decision and for a couple of reasons.

First and foremost, if we're truly NAV per share driven, we're compelled to run down every avenue to drive value including the potential sale. To not pursue the potential sale route would have been inconsistent with our philosophy. Second, running a thorough sales process is not an easy task.

It requires a tremendous degree of preparation, a lot of thought and effort and we're a better team because of it. Getting an up close and personal look at the peer group was an eye-opening experience for the Coal team, and they've gained even more confidence on the value proposition and opportunity set that lies in front of them because of it.

And when you look at everything from cost structure, quality of the reserves, the abundance of reserves, access to domestic and international markets and the ability to thrive and generate free cash flow in both strong and weak markets, along with a workforce and management team that's second to none, the sky's the limit for the Coal team moving forward.

There's no company better positioned in the coal industry, and the options that exist for future growth are boundless. In short, our experience through the sale process, that confirmed irrefutably what we already knew.

And the process brought significant interest across a very wide universe and you can broadly categorize the interest that we saw into two buckets, strategic buyers and financial buyers. I think everyone acknowledges our (7:20) superior asset base and its position in the market, however there were two issues that we saw.

First, in terms of the strategics, even though many saw the intrinsic value of the Coal assets, none were able to pay a fair value for them.

That's because either the strategic was starting and struggling with a stressed balance sheet and could not obtain financing, or it suffered a bit of a credibility deficit with its equity ownership in many instances who were not too long ago creditors.

This weakness we saw from the strategics and the sale process, that's an opportunity for us in a spin world. As I mentioned earlier, Coal Co. will have the strongest financial position in the industry which is currently populated with opportunity for M&A. So strategics, I'd sum them up as willing but not able.

Second, when you look at the financials, there we were dealing with a situation with potential buyers who are used to being liquidity providers to the stressed entities.

That translates usually to these kind of valuations which maybe are more applicable to the rest of the coal industry or back in 2015, but certainly that isn't the case for CONSOL Energy today. So I'd sum up the financials as able but not willing. In the end, we received multiple bids for the sale of the Pennsylvania mining complex.

None of them delivered compelling results. Does that mean that if a valid bid came in over the top during the 11th hour that we wouldn't consider it? Of course not. We've got a duty to always evaluate everything on the table.

That said, it's important to reiterate that the Pennsylvania mining complex is the premier thermal coal complex in the world and again generates free cash flow in any part of the cycle. But on top of that, a strong contracted position. You've got the best entity out there that could trade at a premium to the peer group.

As a result, that means we shifted our entire focus to executing the spinoff transaction of the Coal business. And as highlighted recently, we filed a Form 10 Registration Statement back on July 11, typically takes 60 to 90 days to get through the SEC process.

Therefore, we remain confident that we'll be in a position to execute and complete the spinoff as early as year-end 2017. Now, there's no doubt there's value to be realized by separating these businesses.

However, the ultimate timing as to when we hit the spin button is when things really get interesting, because we may have the opportunity to execute some important strategic moves between the time that we'll call – what I'll label spin-ready, and the time at which we elect to hit go to execute the transaction.

For example, we could explore stock buybacks, as well as looking and assessing the growth rate of the natural gas segment, along with other classic NAV per share avenues.

So time is going to tell, but we expect to be in a position that provides us with the flexibility to make these sorts of decisions over the coming quarters, and we plan to continue evaluating the most favorable timing for completion of the spin, whether it's year-end this year or early 2018.

I'd like to conclude by addressing the management changes we announced as part of our Form 10 filing. Don Rush is taking over as the Chief Financial Officer of the E&P company, while Dave Khani moves over to Coal Co. Don has been a key player during his 12 years with the company.

Most recently, Don headed up our Energy Marketing Department, where he brought his diverse talents to our hedging program and M&A activities. And when you look over the past five years, he spearheaded every major strategic transaction during our transition into a pure-play E&P. He's poised to take the company to the next level.

Got no doubt that he will do just that. As for Dave Khani, many of you know Dave and you've worked with him over the past six years, so I don't need to tell you about all of his accomplishments, which have helped our transformation of CONSOL tremendously.

I want to thank Dave for his commitment to CONSOL and I'll tell you, we expect great things from him and the rest of the Coal Co. management team moving forward. And with that, speaking of Dave, I'm going to turn it over to him..

Thanks, Nick, and good morning, everyone. I'd like to start off with our quarterly results, highlighted on slide 4. In the second quarter, CONSOL reported adjusted income and adjusted EBITDA from continuing operations of $39 million or $0.17 per diluted share and $178 million, respectively.

On a GAAP basis, the company reported net income from continuing operations of $170 million or $0.73 per share attributable to CONSOL shareholders, primarily reflecting a $127 million gain on asset sales, $116 million unrealized gain on commodity derivatives, and $35 million in other non-recurring fees.

Flipping over to slide 5, you can see that, in the quarter, we generated $273 million in total free cash flow, including the $326 million of asset sales that Nick mentioned. We continue to focus on reducing debt and generating free cash flow with the proceeds from asset sales that closed in this quarter.

As a result, we've increased our cash position substantially. During the quarter, we repurchased $19 million of our 2022 maturity bonds at an average price of $99.51. And after the close of the quarter, we used $95 million of cash to redeem the total outstanding balance of the 2020 and 2021 maturity bonds.

Lastly, you'll notice that on the slide, that our capital expenditures were up slightly this quarter compared to the first quarter of 2017, primarily driven by addition completion activity in the quarter. This will set up strong production growth in the second half of 2017.

Now let's move to slide 6, which highlights the company's leverage and liquidity profile over time. Since year-end 2015, CONSOL has steadily focused on reducing leverage and increasing liquidity through the old-fashioned way of growing production, cutting costs, and selling non-core assets.

Since then, we've seen a 40% decline in our leverage ratio and a $1.1 billion increase in liquidity. As of this quarter, we are 3 times leveraged in $2 billion of liquidity, a sequential half a turn decrease and $300 million increase from first quarter of 2017, respectively.

For the full year, we project year-end leverage ratio to be about 2.6 times, a modest change from last quarter, reflecting lower commodity prices and using $400 million in asset sales.

Now, I want to caution you that we still have a large bucket of asset sale processes going on, so we can hit the higher end of the asset sales guidance or even higher, but some of these will carry EBITDA generation. So our year-end leverage ratio could come down meaningfully from the 2.6 times.

Moving over to slide 7, we have been showing and updating this slide for some time now. And as a reminder, this slide represents our legacy liabilities associated with the Coal business.

These Coal-related liabilities, legacy liabilities, are reflected in the recent filing of a Form 10 regarding our intent to spin off our Coal business, which will consist of our PA mining complex, Baltimore terminal, certain coal reserves, and these legacy liabilities.

We continue to expect that these liabilities will decrease over time naturally with the underlying demographics of the personnel, and our goal will be to continue to find ways to shrink them even faster.

We also show this at a higher discount rate, given our view that the discount rate should more closely match our weighted average cost of our debt of around 6.5%.

Now let's shift over to our hedging program on slide 8, which lays out our hedging strategy as we continue to derisk revenues with our systematic hedge program and our other innovative marketing strategies. In the second quarter, CONSOL added NYMEX natural gas hedges of 88 Bcf for the periods of 2018 to 2020.

And we also added 101 Bcf of basis hedges for 2018 to 2021. As shown on that slide, approximately 73% of our guided 2017 production is completely hedged on both NYMEX and basis. We're also more than 50% fully hedged for 2018 and continue to layer in consistent with our hedge program and opportunistic moves in the market.

As of July 31, our $2.7 billion hedge book is modestly in the money. Before turning it over to Tim, I want to provide some quick highlights regarding guidance.

If you look at slide 9, which walks through our updated 2017 segment guidance, for production, we are reaffirming our previous production guidance of 420 Bcfe to 440 Bcfe, while slightly taking down basis guidance by $0.08 per Mcf, resulting from widening differentials.

As for capital expenditures, as Nick already mentioned, we are increasing our E&P capital range for the year by approximately $80 million. Tim will go into more details of this, but the main drivers are the increase due to service cost inflation and in continuous improvement initiatives, which include additional drilling activity for the year.

As per unit operating cost and other expenses, we are reaffirming guidance on the previous quarter. I will note that over the second half of the year, we expect a substantial number of Monroe County wells to get turned in line. This area has been more favorable – has more favorable gathering rate.

As a result, we expect to see a meaningful decrease to gathering transportation line over the course of the third and fourth quarter. Now as for 2018, with the exception of the full year production guidance, we've removed more the detailed guidance for next year since some of the details are fluid. Tim will touch more on this.

While we will provide updated guidance later this year, we continue to expect improving basis differentials into 2018, as well as continued improvements in per unit operating expenses. Lastly, turning to slide 10. We are reducing our 2017 EBITDA guidance by 6%, compared to the first quarter earnings release.

The change to the E&P segment is driven by lower spot prices and slightly WAIR (17:02) basis differentials. PA mining operations EBITDA guidance is unchanged. I'll also remind everyone that we expect around $100 million of tax refund in the second half of this year.

So in summary, we are in the final stage of our balance sheet's deleveraging which helps set the stage for formal separation of the two businesses. Our focus on free cash flow generation is strategic divestiture of non-core asset sales that made this transition possible and we'll position both companies for lasting success.

As we move towards the split, and I'd say transition to help build the Coal side of our business, you can see that each entity has a strong asset base, strong management team, growth opportunities, strong balance sheet and free cash flow. With that, I'll turn it over to Tim..

Thanks, Dave. I'd like to begin by highlighting where we are at for this year. As Nick and Dave said, we've recently increased our capital for 2017, we're maintaining our production guidance for 2017, and we're increasing our 2018 production by 30 Bcf.

We did this because we continue to see improved production performance through optimization of our completion programs, well spacing and landing points.

Although we did have a decrease in production this quarter due to two operational anomalies which resulted in turn-in-line delays on two Monroe County pads, we continue to see outstanding efficiencies with increased stages per day and improved water logistics resulting in decreased turn-in-line times.

Now flipping over to slide 11, I'd like to focus on the results from this quarter. Prices were down due to the commodity pulling back while basis further widened. That decrease was partially offset by additional cost improvements. Production during the quarter was 92.2 Bcfe which is a 3% decrease from the first quarter.

There are two drivers for the slight decline which Nick has already highlighted but I want to expand upon. The first was due to the 3 Bcf production that was part of the asset sale package in West Virginia which was retroactive to January 1 of this year through May 31. The second reason had to do with two operational delays we saw during the quarter.

If you recall, last quarter we stated that we expected to turn in line three pads, one Marcellus and two Monroe County dry Utica pads. One of the delayed dry Utica pads was due to a fishing operation related to frac plug drill out which delayed the turn in line by 39 days.

The second pad was delayed due to pre-frac well prep issues on the switch 5D lateral (19:49), which prevented us from initially completing 4,000 feet of lateral in the tow and causing a 53-day delay. The skip section of lateral was later completed utilizing frac diversion.

Fortunately, our prior experience with diversion technology during our re-fracs allowed for a successful completion of this lateral. We continue to optimize our completion design on the Monroe County wells with increased proppant loading to improve EURs and economics.

This increased proppant has presented challenges with frac pump maintenance and tubing hanger erosion but we have procedures in place to overcome these challenges and to further increase our frac efficiencies, which gives us great confidence in our turn-in-line forecast going forward.

Despite some of the operational challenges encountered on the two Monroe pads, we continue to see improvements in operational efficiencies and cycle times. Specifically, the five-well PENS2 Marcellus pad in Ritchie County, West Virginia was turned in line 25 days early compared to our plan at the end of the first quarter.

Frac efficiency in water drove this improvement to plan, and we initiated sales from this pad 49 days after starting tow prep. We're applying these same techniques to other areas. Shifting to the topic of capital, during the quarter capital spend was around $142 million, which is an increase from the first quarter by approximately $40 million.

This is due in part to additional completion activity which, if you turn to slide 12, is highlighted in the Q2 2017 summary table along with service cost inflation related to pressure pumping services.

Our goal has always been to offset service cost inflation impacts through increased efficiencies, improved cycle times, and continued optimization of our completion designs, all of which result in higher EURs and turning wells in line sooner.

The net effect on rate of return from service cost inflation and type curve bumps has been positive in most areas. In all of our active core areas, rates of return remain well above 50%. We ran two rigs in the quarter and drilled seven total wells.

Five wells in Monroe County, Ohio and two deep dry Utica wells in CPA, which were the Aikens wells that I'll talk about shortly. We completed 15 wells in the second quarter, which is up from 9 in the first quarter.

When you look at our 2017 development plan on the slide, you can see that our TD count has increased by nine wells compared to previous guidance, while our turned in line guidance has remained unchanged. This increase in activity is actually a result of cycle time compression that we've been talking about for the past handful of quarters.

Due to continued drilling cycle time improvements, we have been able to pull forward drilling activity and run two rigs continuous, which eliminates the need for a third rig later this year, and results in nine additional wells. If you look back a year, a single rig drilled 15 wells. In 2017, we are drilling 18 wells per rig.

As Dave mentioned, this has taken up our 2017 expected capital budget as a result, but it will also drive a significant production bump for full year 2018. I would also note that we're not updating our 2018 development plan at this time but we do expect to bring on a third rig early in 2018.

As for CapEx levels in 2018, we remain committed to being free cash flow positive and only spending in high rate of return area, but specific development plans and activity levels for next year will ultimately depend on further continuous improvements, dry Utica delineation, stacked pay opportunities and other factors.

We have a clear line of sight regarding production, but there's a few variables that are still being evaluated. Once the evaluation is complete, the expectation would be to provide guidance for 2018 and possibly beyond. So stay tuned.

Shifting to slide 13, as I mentioned, during the quarter, we drilled two dry Utica wells in Westmoreland County, Pennsylvania. These two wells are offsets to our Gaut 4IH well. The efficiency improvements we've seen over the course of these two wells has been remarkable.

Specifically, we drill the Aikens 5J and 5M wells with average lateral lengths of 7,500 feet and 38.5 days on average, compared to the 99 days it took to drill the Gaut with a 7,000-foot lateral.

These improvements have resulted in drilling cost for the Aikens 5J and 5M, decreasing to $5.5 million and $4.6 million, respectively, which is a 71% decrease from the Gaut well. We expect the total capital for these wells to be under $15 million.

Now this is a slight increase from our previously stated guidance of $12.6 million, but it's due to testing increased proppant loading which we expect to correspondingly result in increased EUR projections.

We expect these Aikens wells to be on line in the fourth quarter of 2017 and with sub-$15 million deep dry Utica wells and Gaut-like performance, we remain steadfast in our belief that the deep dry Utica potential will outpace that of the Marcellus in the coming years.

In conjunction with our non-updated program, we are quickly figuring out the formula for this precision play in stacked pay development. This is why we are dedicated to delineating the Utica and Pennsylvania and West Virginia and moving more non-core acreage in the quarter.

Now you've heard us discuss the modifications we've made to our production protocol in some of our fields. We highlighted a few of these last quarter, and slide 14 highlights an additional field which we know is Richhill. It's located in southwestern Pennsylvania.

Our modeling work is helping us hone our understanding of compressibility, compaction, and pressure-dependent Perm (26:06). Thus, we're modifying our production protocol in this field and are seeing 20% increases in type curves.

Like similar areas, especially ones highlighted as recent as last quarter, this is resulting in more actual production flowing at a flatter, higher rate over a longer period of time. I'll conclude by highlighting our production cadence for the remainder of 2017. We expect to turn in line 5 pads in the third quarter and 6 pads in the fourth quarter.

This actually works out to slightly more wells getting turned in line in the third quarter. That said, due to timing associated with when those wells go online, we expect a production increase in the third quarter compared to the second and an even larger production increase in the fourth quarter.

So the program is very back end-weighted, with even more production expected in Q4 than Q3. And with that, I will turn it back over to Tyler..

Thanks, Tim. This concludes our prepared remarks.

Allan, can you please open the line up for questions at this time?.

Thank you. Our first question will come from the line of Holly Stewart with Scotia Howard Weil. Please go ahead..

Good morning, gentlemen..

Good morning..

Good morning..

Good morning..

Maybe the first one for Nick. Nick, you mentioned spin-ready versus the time when you actually hit the go button, and I didn't quite follow the difference there. Is this market dynamics? Just trying to better understand kind of timing and sort of thoughts around timing..

Sure. I break this into sort of two timeframes. One will be all the things that we need to accomplish, whether it's the SEC process or the internal moves that we need to make to separate payroll and management teams, et cetera, to get everything set up as two independent companies. All of that will be concluded by year-end this year.

That gets us to what I call that point in time of spin-ready. The second timeframe, or the second decision, is when we actually hit the spin button. And being NAV per share driven, and looking at that as our primary filter, we've got a situation where a couple of things are happening. One, of course, would be spin-ready.

Two, the balance sheet for the consolidated company, as well as the two separate companies, Coal Co. and E&P Co., will be in very strong position with or without additional asset sales, as we said, and we plan on additional asset monetizations.

Three, the E&P segment, based on what Tim and Dave lined out in the new guidance numbers, will be growing quickly and significantly.

And the last remaining factor is where we see opportunities for either incremental activity set on E&P side or share count reduction, and that's a function, of course, what our shares are trading at versus what we think the NAV per share of the company is when you look at our going concern.

So if we're free cash flow positive and all those things are present and we're spin-ready, we may want to take advantage of what I'll call the discount or the misunderstanding in the market, if it's still there as we get to year-end, and wait a modest amount of time, whether it's a quarter or two quarters, versus hitting the spin button immediately..

Okay..

Either way, whether it's – now or later, the company will be situated and positioned to spin and separate sometime towards the end of this year..

Okay. Got it. And then, maybe just taking that a step forward on the balance sheet and – of kind of Gas Co.-Coal Co.

spin is the best way to think about that, like balance sheet-neutral in best case, both situations, depending on the free cash element?.

Yeah. So the balance sheet on a consolidated basis as we approach year-end is going to be, as we said, we got it towards a mid-2s range, with really no additional asset monetizations.

If you assume we get to the higher end of our guidance range of $400 million to $600 million of monetizations by year-end, that would effectively be lower, approaching probably something around 2 times or maybe even lower than that. And, under any range within that spectrum, either Coal Co. or E&P Co.

should be in very strong position, depending on how we want to map the debt between the two entities to go out on their own and do what they need to do. Both we would also expect to be free cash flow generators..

Got it. Thank you. And then maybe just one final one on the 2018 rig count addition. I know you haven't broken out more details on the 2018 guide.

But is the bias here adding a rig early in the year and kind of Marcellus versus Utica thoughts, at least at this point?.

Well, I – all we've said is, we're going to add a rig, we're still evaluating some things. The Marcellus-Utica mix depends on several factors. Our delineation program is going to continue, and we've got a plan for our Utica delineation, but there will still be a mix of Marcellus.

But the final mix, I think, is yet to be determined, but there will certainly be a mix..

Okay. Thanks, guys..

Thank you..

We'll go next to the line of Neal Dingmann with SunTrust. Go ahead, please..

Good morning, gentlemen. My question's probably for Tim. Tim, looking at – guess it's, let's see, slide 13 and 14. And my question is, looking at these, and certainly it appears the decline curve of these wells are holding up very nicely.

How would you compare either one of these as basically just the general southwest PA wells to your Monroe County wells, when you start talking economics these days?.

The economics are similar. Monroe County right now is, from a rate of return, is top of our list, but they all are in excess of 50%. Monroe County, I think, based on the activity you've seen there over the last year, kind of highlights that, but all are generating good rates of return.

Type curves, there's certainly some differences in type curves between Utica and Marcellus, but at the end of the day, when you look at the rates of returns, they're all competitive.

But they – the Monroe County, we're still doing a lot of work trying to continually optimize completions, see if we can extend that flat period of initial production, see if we can extend that out longer, and we've had some success with that and we'll continue working on that..

And then, Tim, the delays that you saw in the completion, will that cause you to change any of the pad design to do either more wells or less wells on the pad or change anything? I just wonder, do you just look at that as just sort of – abnormal sort of one-time event and you feel pretty good about the pads going forward in Monroe?.

Yeah. Those are really one-time events. And if you look back at the last couple of years, we have had very, very few events like this. But when you look at the rate we have changed at, the operational improvements we've made, we are constantly pushing, we're trying new things.

And occasionally we will have issues, but we were able to figure out how to overcome those issues, get past them. And actually every time something goes wrong, you learn something that makes you better. So we're very confident in our path forward, our continued efficiency gains and our improvement in the turn-in-line schedule.

These are one-time issues and they shouldn't be correlated to any other areas of our Utica or Marcellus development. They are one-time issues that we have worked past..

Okay. And then lastly maybe for Khani, just David, hedges, I think you said went out to 2019 and 2020.

Was this something you'll continue to add, or are you all kind of full now as far as the amount of hedges you'd like at least through 2018 and 2019?.

Yeah. We have a program hedge that we generally will go up to 80% in the – as we start the year. So think about right now, we said for 2018, we're at about 50%. So as we continue to get towards December 31, that number will – that 50% number will go up.

We also – as we added the $78 million of capital, we also hedged half of that production that we got out for 2018, 2019, 2020, 2021. And so we will, systematically as we add capital, we will also lock in some hedging so that we can make sure we capture the rates of return which we feel very, very good about even as the commodity is pulled back..

Excellent. Thank you, all..

Thank you..

We'll go next to the line of Joe Allman with FBR. Please go ahead..

Thank you. Good morning, everybody..

Good morning..

Good morning..

Hey, Nick. Just to clarify. So, in terms of Coal Co.

and E&P Co., so when you talk about those entities being well capitalized, so you're thinking net debt to EBITDA somewhere between 2 and 2.5 times in both cases would be suitable for both entities?.

Well, Joe, if you go again, starting with the consolidated companies that sits today, we will be in that range you just articulated as we approach year-end, depending on where the asset monetizations come in at and at what level, right, beyond what we've already – so that's sort of the higher end is the mid-2s, and then lower to the extent that we're successful on monetization.

Now, I don't know in particular how the proportional shares will be between Coal Co. and E&P Co. at this point. But I think that's a reasonable assumption and range that you're laying out there.

Point being, we want to create two companies that are in very strong position, and when you look at balance sheet are in healthy position that did not just sustain themselves in their stand-alone markets, but actually can thrive And it's a bit of a different opportunity set for the two, of course.

But there is, nevertheless, significant opportunities for both entities out there. And so there's the starting point of the balance sheet, and then the acknowledgement and our recognition that both are going to be – should be free cash flow generators as well..

Okay. That's very helpful.

And then in terms of asset sales, the E&P production guidance currently for 2017 contemplates what level of assets? Is it the $400 million level, or is it the midpoint? And if you were to make, say, $600 million of asset sales this year do you think you will need to adjust your production guidance?.

Yeah. So, yeah. So, Joe, the guidance that we have in place incorporates the asset sales that we've already done, the $400 million which had some production associated with the West Virginia production that was highlighted by Tim.

Going forward, if we go in and we sell something with – that does have production associated with, we would have to adjust the asset sales but then again, we may also offset it with efficiencies as well. So you have moving targets on both sides..

Got it. Okay. So potentially, this solves on the upper end or above the upper end. It might impact 2017 production a little bit, maybe even 2018 a little bit but okay, but there might be some offset..

That's right..

Okay. Great. And then just – when you talked about the free cash flow, I just want to clarify going forward.

Are you really specifically speaking about organic free cash flow or when you think about free cash flow, you're also including the proceeds from asset sales on a go-forward basis?.

So I think on a go-forward, probably the – ironically, the best context to start that discussion is what we've done the past couple of years.

I think the past couple of years, each and every quarter, we've been in free cash flow positive as a company, whether it's been in the most challenging of market conditions in late 2015 or early 2016 or currently today.

But also to your point, when you look at what that means when we look into the rest of this year and then to 2018 and 2019, our contribution of the free cash flow coming from asset monetizations, our expectation and our view is they will be significantly lower than what it's been in prior periods.

So generally speaking, when you talk free cash flow positive of CONSOL Energy or Coal Co. or E&P Co. post-spin, our expectation is that would be organic free cash flow..

Okay. That's very helpful. And lastly, a quick one.

Tim, just – could you just explain, like, what gives you the confidence that the turn-in-line schedule is going to be – is kind of set here and you won't have the delays you experienced in the second quarter?.

I think past experience and as I've said, the issues we ran into in the second quarter, they will happen occasionally as we push to get better and improve. But they were one-time issues that we learned from, we're moving forward.

And as I said, if you look back over the last couple of years, we have had very, very few of these and we continue to see improved efficiencies and ways to pull forward our turn-in-line schedule.

And I think that has a lot to do with our – our guidance hasn't changed with production slightly being down and that is because of the confidence we have in our operations, our activity and our planned improvements..

Great. All right. Very helpful, guys. Thank you..

We'll go next to the line of Jeff Robertson with Barclays. Go ahead, please..

Thanks. A question, Nick. In your comments about the review of Coal Co., did you see opportunities on the strategic side that therefore consolidates (40:54) Coal Co.

as a result of the process you all went through?.

Yeah. I think we did. And that was again one of the benefits of going through that process and the rigor that we did. It was an eye-opener, as I've said, for the Coal team. And what we see out there for a standalone coal co-entity that's got the Pennsylvania mining complex in it coupled with that management team, is a very target-rich environment.

So I'm sure – one of the first orders of business for Coal Co.

once the separation is effectuated is figuring out whether it's within Northern Appalachia or within the United States and beyond, which assets are the best fit when you look at the synergies and value creation versus other opportunities internal to the asset base, including the coal reserves that they'll control within Coal Co.

So it's a, like I said, a target-rich environment. I think that came out loud and clear, looking through ironically a sale process and really got us thinking strategically about Coal Co. on a stand-alone basis beyond what its going concern NAV per share proposition is..

Would any of those opportunities – I would guess they would need – you would need to complete the spin of Coal Co. before Coal Co.

could try to take advantage (42:18)?.

Yes. Yes, yes..

Yeah. So, right now, nothing contemplated, nothing on the drawing board. But just looking at Coal Co.'s asset base and its market position, the cash flows it will generate, the balance sheet that it will have, and then what's available and what's out there across the entire coal industry, I think that's an opportunity..

A question on the Pennsylvania Utica well, the two Aikens wells.

Is there any one thing that you all did differently drilling those wells that resulted in such a big decrease in drilling days? And then second question on that is, in terms of completion on those two wells, what have you learned from the production performance in the way the Gaut well has behaved that makes you want to tweak something as you look to complete these next two wells?.

Well, on the drilling side, we've got a much better understanding now of the geology, particularly drilling through the vertical section that includes 1,300 feet or so of salt or salt section that can be very unconsolidated and challenging to drill through.

But we learned quite a bit drilling through that when we drilled the Gaut, and we're able to take what we learned there. And then we've made some modifications to our downhole assembly, their bit selection, fluid system. I mean, just modifications. No huge changes but we continue to learn and progress from every well we drill.

And so that obviously had a significant impact on the Aikens – drilling the Aikens wells. From the completion standpoint, as we do in Monroe County and Southwest PA with our Marcellus, we are constantly looking at how we can optimize our completions through proppant selection, proppant loading, and we're doing that with the Aikens wells, too.

We'll probably see an increase in proppant loading in those compared to the Gaut or at least one of them, if not both. And looking at proppant selection, the blend of proppant, the percentage of ceramic versus white sand. So, we continue to model and evaluate that.

And our goal is to improve the EUR per foot lateral and we think there is opportunity to improve than what we've seen in the Gaut and we are extremely excited and pleased with what we got out of the Gaut. But we think there's an opportunity to improve on that..

Then, last question, the third rig that you all are contemplating adding in 2018, is it too preliminary to talk about where you think the drilling activity will be concentrated next year?.

At this point, yes. I mean, I think it's safe to say we talked about our core areas that we're going to focus on. And it will involve a mix of wells from those areas, but the exact well schedule has not been laid out and confirmed at this point. As I said, we've got a couple things that we're still evaluating and looking at.

We certainly have ideas, but that should become a little more firm in the next quarter or two, and we'll be coming out with those plans then..

Thank you..

For our next question, we'll go to the line of Biju Perincheril with Susquehanna. Go ahead..

Hi. Good morning. A quick question on 2018 plans. I know it's still being finalized.

But on the revised guidance, can you talk about how many more turned-in lines you are contemplating for next year, or is the increase mostly tied to the better well performance?.

Well, being that we haven't made our plan public yet, we can't talk about the increased number of turned-in lines. But I think if you look at the changes we're making in 2017, adding rigs there – or adding wells there to the current rig lines because of added efficiencies, you can probably say comfortably, we're at least adding nine..

Okay..

But we – obviously with production going up 30 Bcf, there's going to be more turned-in line, but we just don't have the specific schedule to talk about yet..

Okay. That's fair.

The essential Pennsylvania, Utica, it is – from the two wells that you drilled, what are the next plans, or are you waiting to see the completion – the rates from these two wells before deciding the next plans there?.

No, we've got a delineation program that we have laid out and we have, we're really sticking to. Some of that is non-op data points. We've got a – there's a non-op well that'll be coming online here in the next few weeks that will give us additional data.

We've got some others that are planned both, – at least one more of ours later this year, and some additional non-op data points. So we're continuing on with our delineation program. We're not going to wait to see the results from the Aikens. We've got a plan that's based on sound geology and engineering data, and we're moving forward with that..

Okay. Great. Thanks..

We'll go next to the line of Jeffrey Campbell with Tuohy Brothers. Your line is open..

Good morning. I was wondering first, could you just update us on your current non-op Utica activity and what's ahead in the second half of 2017? I'm just wondering if there's any specific areas that you're hoping to derisk with these investments..

Well, the non-op data point is just, whether there are data points or non-op data points, it's just additional data in most cases. Those data points are confirming what our modeling and our geology work has already shown us.

And as I said, we've got a non-op well that we should see first production on in the next two to three weeks, that's down in the, more in the southwest PA area. And then there's another non-op well planned up in – believe it's in Indiana County later this year. We've got an additional well that we'll be drilling later this year.

So, we've got several more data points that will be coming in over the next 12 to 18 months..

And since you mentioned it, is that Indiana County well the first Utica well that's drilled there, or is this a well control there?.

There is a well control up there. This will be the first deep dry Utica well drilled up there. But there is – we've got data from past non-op points, other wells that have been drilled deeper, that we were able to get logs and geology on. There's seismic data. So, we've got a significant data set to give us a view of that area..

Helpful. And let me just ask two questions that are kind of A's and B's when you (50:08) answer them. Earlier, you commented on pressure pumping inflation.

I was just wondering, what is your outlook for further inflation the rest of this year and going into 2018? And secondly, you mentioned there was outspend on the two Aikens wells, and it sounded like it was predominantly just bigger completions, but I was wondering if pressure pumping inflation was any portion of that outspend as well? Thanks..

Pressure pumping, we had seen some increases, not unexpected. We do have some inflation built into our plan in 2018 and beyond, roughly 2%. But we're also starting to see some talk from service companies bringing more frac crews into the area, which – that should help stabilize pricing and keep them more consistent.

And some of the increase on the Aikens, just as it is with a portion of our capital increase, is increased pumping cost, but a lot of it is proppant loading and testing of different proppants and increased loading..

Okay. Great. Thank you..

We'll go next to the line of James Spicer with Wells Fargo. Go ahead please..

Yeah. Hi. Good morning. Just got a couple of questions.

Firstly, can you provide any color on what the potential assets you'd be marketing to get to the higher end of your asset sale range?.

Yeah. We don't – we do not comment on specific assets. So you just kind of have to wait until we execute and then we'll announce them..

But – I guess generally, Marcellus, Utica acreage undeveloped and potentially developed, correct?.

Again, I think we have a lot of acres in a lot of different categories, and I think in a lot of different type of assets. We still have coal assets; we have E&P assets; we have midstream assets. So there's a whole big bucket of other stuff that – beyond just Marcellus, Utica..

Okay. Understood. And then secondly, just trying to understand the mechanics of the spin and the impact on the balance sheet. It sounds like with the spin, you'll raise capital with the Coal entity and then there's probably a one-time distribution that gets sent back to CONSOL.

Am I thinking about that correctly? And then I also saw that there might be a specific 2.5 times max leverage requirement at CONSOL but wasn't totally clear on that..

Yeah. The mechanics, you're right. Coal Co. will raise capital to get mapped, okay? And there will be a one-time distribution back to CONSOL. And as far as any specific leverage ratio, there really isn't – that is, we have nothing in our covenants specifically really except the ties to stock buyback at a much higher leverage ratio.

Beyond that, there's no leverage limits that we have to deal with. That's all self-imposed at this point..

Okay. Okay. Thank you.

And then finally, the asset sales that you're doing on the E&P side, do you expect this to have any impact on your borrowing base?.

Very, very minimum to nothing because what we have – as we've increased drilling, we've had cushion building up and so we should be fine. Now, some of the future ones, if we have any associated production with them, that's where we could have potentially have some modest impact.

But again, we're – as we increased drilling, we're effectively building up cushion..

Okay. That's it. Thank you..

Welcome..

We have a follow-up question from the line of Joe Allman. Please go ahead..

Yeah. Thank you. I actually received a question from an investor just about the potential of delaying the spin for a quarter or two. So I know, Nick, you – I know you divided up the process into two parts being spin-ready by year-end and then after that just deciding on when to actually spin.

And I know you want to make sure the balance sheet is in good shape.

But could you again go over the reasons why you would consider delaying the spin by a quarter or two?.

Yeah. The reasons primarily would be NAV per share opportunities. So it would not be because of leverage ratio or market conditions or not being ready to spin.

And at the end of the day, Joe, I think that the biggest example of this is – and I know you hear this I'm sure from many different entities, but we are firmly in the belief that our current share price is at a significant discount to what the intrinsic value of this company is.

And maybe in the past, there were lots of reasons why because of complexity or things like that as to why that was. But those issues have either been completely resolved or largely resolved.

On top of it, with our balance sheet approaching, where it's at currently and where it's going to finish at year-end, there's going to be the wherewithal to take advantage of that disconnect.

So instead of complaining about it or lamenting about it, we are now entering an area of optionality because of our balance sheet, because of our free cash flow, because of the growth on the E&P side, because of the market position that the Coal team has put in place with the power plant customers, to take advantage of it instead of complaining about it.

And we just want to come up with a path and a timing that uses that optionality to our advantage to maybe take advantage of some really value-creating opportunities that might be coming along once in a long time..

Okay. All right. Very helpful, Nick. Thank you..

And we have no further questions in queue. I'll turn it back over to your speakers..

Great. Thank you everyone for joining us this morning. We look forward to speaking with you again next quarter..

And ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect..